Tuesday, May 10, 2016

2:05 PM

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Abraham (Avi) Seidmann
Nowadays, businesses are turning more and more to the use of cloud services. Software applications and services known as software as a service (SaaS) are available online on demand. In this way, SaaS brings corporate users an alternative to modifiable off-the-shelf software (MOTS).

SaaS offers economies of scale. It allows businesses to increase volume output with fewer people, reduce investment on technology infrastructure, and maintain easy access to critical information with minimal upfront spending.

Impressive claims indeed. But a new study by Abraham (Avi) Seidmann, Xerox Professor of Computers and Information Systems and Operations Management, and Dan Ma ’03S (MS), ’06 (PhD) of Singapore Management University, shows MOTS packages still have an important role to play. They built a game-theory model to study the competition between SaaS and MOTS.

“Contrary to popular articles on this topic, the competitive advantage of SaaS stems as much from the efficient pooling of transaction volatility risks as from the reduced cost,” Ma says.

“Most SaaS systems provide limited customization options because they are operating in a multitenancy environment,” Seidmann says. “Multiple customers share the same application, running on the same operating system, hardware, and data-storage mechanism. This is how SaaS attains economies of scale, but as a result, users incur lack-of-fit and significant integration costs.”

The typical in-house MOTS system, however, is more easily customized and better integrated.

To compete successfully, SaaS providers should make reducing lack-of-fit costs a top priority. SaaS will attain a solid position and grow as more software standards are adopted, uniform-platform efforts continue, and technology improves.

Seidmann and Ma also urge appropriate pricing strategies. They suggest that SaaS should adopt a higher value but a lower price strategy; users will see economies of scale with steadily reduced SaaS prices. MOTS providers instead should focus on enhancing product value with richer features and full functionality. This will boost the software’s perceived value and hold its market power in certain segments.

Since the SaaS trend seems unstoppable in some markets, leading software providers should offer both MOTS and SaaS options, the authors note. The trend already is evident: SAP, Microsoft, and Oracle offer both versions.  —Sally Parker

FURTHER READING:


Ma, Dan and Seidmann, Abraham. 2015. “Analyzing Software as a Service with Per-Transaction Charges.” Information Systems Research 26 (2): 360–378. http://dx.doi.org/10.1287/isre.2015.0571

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